14AUG200320522856 7MAY200421084229 BEST BUY CO., INC. 7601 Penn Avenue South Richfield, Minnesota 55423 NOTICE OF 2005 REGULAR MEETING OF SHAREHOLDERS Time: 9:30 a.m., Central Daylight Time, on Thursday, June 23, 2005 Place: Best Buy Corporate Campus — Theater 7601 Penn Avenue South Richfield, Minnesota 55423 Items of Business: 1. To elect six Class 2 directors to serve on our Board of Directors for a term of two years. 2. To ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the current fiscal year. 3. To transact such other business as may properly come before the meeting. Record Date: You may vote if you are a shareholder of record of Best Buy Co., Inc. as of the close of business on Monday, April 25, 2005. Proxy Voting: Your vote is important. You may vote via proxy: 1. By visiting www.proxyvote.com on the Internet; 2. By calling (within the U.S. or Canada) toll-free at 1-800-690-6903; or 3. By signing and returning the enclosed proxy card. Regardless of whether you expect to attend the meeting in person, please vote your shares in one of the three ways outlined above. By Order of the Board of Directors Minneapolis, Minnesota Elliot S. Kaplan May 20, 2005 Secretary Help us make a difference by eliminating paper proxy mailings to your home or business. With your consent, we will provide all future proxy voting materials and annual reports to you electronically. You may enroll for electronic delivery of future Best Buy shareholder materials at www.BestBuy.com—under ‘‘Company Information,’’ select the ‘‘For Our Investors’’ link and then the ‘‘Click Here to Enroll’’ link in the middle of the page. Your consent to receive shareholder materials electronically will remain in effect until canceled by you.
Transcript
14AUG200320522856
7MAY200421084229
BEST BUY CO., INC.7601 Penn Avenue South
Richfield, Minnesota 55423
NOTICE OF 2005 REGULAR MEETING OF SHAREHOLDERS
Time: 9:30 a.m., Central Daylight Time, on Thursday, June 23, 2005
Place: Best Buy Corporate Campus — Theater7601 Penn Avenue SouthRichfield, Minnesota 55423
Items ofBusiness: 1. To elect six Class 2 directors to serve on our Board of Directors for a term of two years.
2. To ratify the appointment of Deloitte & Touche LLP as our independent registered publicaccounting firm for the current fiscal year.
3. To transact such other business as may properly come before the meeting.
Record Date: You may vote if you are a shareholder of record of Best Buy Co., Inc. as of the close of business onMonday, April 25, 2005.
Proxy Voting: Your vote is important. You may vote via proxy:
1. By visiting www.proxyvote.com on the Internet;
2. By calling (within the U.S. or Canada) toll-free at 1-800-690-6903; or
3. By signing and returning the enclosed proxy card.
Regardless of whether you expect to attend the meeting in person, please vote your shares in one of the three waysoutlined above.
By Order of the Board of Directors
Minneapolis, Minnesota Elliot S. KaplanMay 20, 2005 Secretary
Help us make a difference by eliminating paper proxy mailings to your home or business. With your consent, we will provide allfuture proxy voting materials and annual reports to you electronically. You may enroll for electronic delivery of future Best Buyshareholder materials at www.BestBuy.com—under ‘‘Company Information,’’ select the ‘‘For Our Investors’’ link and then the ‘‘ClickHere to Enroll’’ link in the middle of the page. Your consent to receive shareholder materials electronically will remain in effect untilcanceled by you.
This proxy statement is furnished in connection with the Who may vote?solicitation of proxies by the Best Buy Co., Inc. (‘‘Best
In order to vote at the Meeting, you must be aBuy’’ or ‘‘we’’ or ‘‘us’’) Board of Directors (the ‘‘Board’’)
shareholder of Best Buy as of the record date for theto be voted at our 2005 Regular Meeting of
Meeting.Shareholders (the ‘‘Meeting’’) to be held on Thursday,
When is the record date?June 23, 2005, at 9:30 a.m., Central Daylight Time, atthe Best Buy Corporate Campus Theater, 7601 Penn The Board has established April 25, 2005, as the recordAvenue South, Richfield, Minnesota, or at any date for the Meeting.postponement or adjournment of the Meeting. The
How many shares of Best Buy Common Stock aremailing of proxy materials to shareholders willoutstanding?commence on or about May 20, 2005.
As of the record date, there were 327,786,000 sharesBackground of Best Buy Common Stock outstanding. There are no
other classes of capital stock outstanding.What is the purpose of the Meeting?
At the Meeting, shareholders will vote on the items of Voting Procedurebusiness outlined in the Notice of 2005 Regular Meeting
On what items of business am I voting?of Shareholders (the ‘‘Notice’’), included as the coverpage to this proxy statement. In addition, management You are being asked to vote on the following items ofwill report on our business and respond to questions business:from shareholders.
• The election of six Class 2 directors for a term ofWhy am I receiving this proxy statement and proxy two years;card?
• The ratification of the appointment of Deloitte &You are receiving this proxy statement and proxy card Touche LLP as our independent registered publicbecause you own shares of Best Buy Common Stock and accounting firm for the current fiscal year; andare entitled to vote on the items of business at the
• Such other business as may properly come beforeMeeting. This proxy statement describes the items that
the Meeting.will be voted on at the Meeting and providesinformation on these items so that you can make aninformed decision.
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How do I vote? of our Common Stock that are entitled to vote arepresent at the Meeting. Your shares will be counted as
You may vote:present at the Meeting if you:
• Via the Internet at www.proxyvote.com;• Vote via the Internet or by telephone;
• By telephone (within the U.S. or Canada) toll-free• Properly submit a proxy card (even if you do not
at 1-800-690-6903;provide voting instructions); or
• By signing and returning the enclosed proxy• Attend the Meeting and vote in person.
card; orHow many votes are required to approve an item of
• By attending the Meeting and voting in person.business?
We encourage you to take advantage of the option toPursuant to our Amended and Restated Bylaws, each
vote your shares electronically through the Internet or byitem of business to be voted on at the Meeting requires
telephone. Doing so will result in cost savings for us.the affirmative vote by the holders of a majority of the
How are my voting instructions carried out? shares of Best Buy Common Stock present at the Meetingand entitled to vote. The election of directors and theWhen you vote via proxy, you appoint Richard M.ratification of the appointment of Deloitte & Touche LLPSchulze and Elliot S. Kaplan (the ‘‘Proxy Agents’’) asas our independent registered public accounting firm areyour representatives at the Meeting. The Proxy Agents‘‘routine’’ matters under New York Stock Exchangewill vote your shares at the Meeting, or at any(‘‘NYSE’’) rules. The NYSE rules allow brokerage firms topostponement or adjournment of the Meeting, as youvote their clients’ shares on routine matters if the clientshave instructed them on the proxy card. If you return ado not provide voting instructions. If your brokerage firmproperly executed proxy card without specific votingvotes your shares on these matters because you do notinstructions, the Proxy Agents will vote your shares inprovide voting instructions, your shares will be countedaccordance with the Board’s recommendations. Withfor purposes of establishing a quorum to conductproxy voting, your shares will be voted whether or notbusiness at the Meeting and in determining the numberyou attend the Meeting. Even if you plan to attend theof shares voted for or against the routine matter. If yourMeeting, it is advisable to vote your shares via proxy inbrokerage firm lacks discretionary voting power withadvance of the Meeting in case your plans change.respect to an item that is not a routine matter and you
If an item comes up for vote at the Meeting, or at any do not provide voting instructions (a ‘‘broker non-vote’’),postponement or adjournment of the Meeting, that is not your shares will be counted for purposes of establishingdescribed in the Notice, the Proxy Agents will vote the a quorum to conduct business at the Meeting, but willshares subject to your proxy at their discretion. not be counted in determining the number of shares
voted for or against the matter. Abstentions are countedHow many votes do I have?as present and entitled to vote for purposes of
You have one vote for each share you own, and youdetermining a quorum and will have the same effect as
can vote those shares for each item of business to bevotes against a proposal.
addressed at the Meeting.
How many shares must be present to hold a validMeeting?
For us to hold a valid Meeting, we must have a quorum,which means that a majority of the outstanding shares
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What if I change my mind after I vote via proxy? Who will pay for the cost of soliciting proxies?
You may revoke your proxy at any time before your We pay all of the costs of preparing, printing andshares are voted by: distributing proxy materials. We will reimburse
brokerage firms, banks and other representatives of• Submitting a later-dated proxy prior to the
shareholders for reasonable expenses incurred asMeeting (by mail, Internet or telephone);
defined in the NYSE schedule of charges.• Voting in person at the Meeting; or
Can I receive the proxy materials electronically?• Providing written notice to Best Buy’s Secretary at
Yes. We are pleased to offer shareholders the choice toour principal offices.
receive our proxy materials electronically over theWhere can I find the voting results of the Meeting? Internet instead of receiving paper copies through the
mail. Choosing electronic delivery will save us the costsWe will announce the preliminary voting results at theof printing and mailing these materials. Our fiscal 2005Meeting. We will publish the final voting results in ourannual report and proxy statement are being mailed toQuarterly Report on Form 10-Q for our second fiscalall shareholders who have not already elected to receivequarter ending August 27, 2005. Our Quarterly Reportthese materials electronically. If you are a shareholder ofon Form 10-Q is required to be filed with the Securitiesrecord and would like to receive these materialsand Exchange Commission (‘‘SEC’’) within 40 days ofelectronically in the future, you may enroll for thisthe end of the fiscal quarter.service on the Internet after you vote your shares inaccordance with the instructions for Internet voting setProxy Solicitationforth on the enclosed proxy card.
How are proxies solicited?You may also enroll for electronic delivery of future Best
We will request that brokerage firms, banks, other Buy shareholder materials at any time on our Web sitecustodians, nominees, fiduciaries and other at www.BestBuy.com—under ‘‘Company Information,’’representatives of shareholders forward proxy materials select the ‘‘For Our Investors’’ link and then the ‘‘Clickand annual reports to the beneficial owners of our Here to Enroll’’ link in the middle of the page. As withCommon Stock. We expect to solicit proxies primarily by all Internet usage, the user must pay all access fees andmail, but directors, officers and other employees of Best telephone charges. An electronic version of this proxyBuy may also solicit proxies in person, by telephone, statement is posted on our Web site atthrough electronic transmission and by facsimile www.BestBuy.com — under ‘‘Company Information,’’transmission. Directors and employees of Best Buy do select the ‘‘For Our Investors’’ link and then either thenot receive additional compensation for soliciting ‘‘SEC Filings’’ link or the ‘‘Corporate Governance’’ link.shareholder proxies.
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C O R P O R A T E G O V E R N A N C E A T B E S T B U Y
The Board is elected by the shareholders to oversee our The Board committees have responsibilities as follows:business and affairs. In addition, the Board advises
Audit Committee. — This committee discharges themanagement regarding a broad range of subjects
Board’s oversight responsibility to the shareholders andincluding Best Buy strategies and operating plans.
the investment community regarding: i) the integrity ofMembers of the Board monitor and evaluate our
our financial statements and financial reportingbusiness performance through regular communication
processes; ii) our internal accounting systems, andwith our Chief Executive Officer and other members of
financial and operational controls; iii) the qualificationsmanagement, and by attending Board and Board
and independence of the independent registered publiccommittee meetings.
accounting firm; iv) the performance of our internalThe Board believes in the value of effective corporate audit function and our independent registered publicgovernance and adherence to high ethical standards. As accounting firm; and v) our compliance with ethicssuch, the Board has adopted Corporate Governance programs, including The Code of Business Ethics, andPrinciples and The Code of Business Ethics, both of legal and regulatory requirements.which are posted on our Web site at
In carrying out these duties, this committee maintainswww.BestBuy.com — under ‘‘Company Information,’’
free and open communication between the Board, ourselect the ‘‘For Our Investors’’ link and then the
independent registered public accounting firm, our‘‘Corporate Governance’’ link.
internal auditors and management. This committee meetswith management, the internal audit staff and the
Committees of the Boardindependent registered public accounting firm at least
The Board has five committees: Audit Committee; quarterly. In addition, this committee conducts quarterlyCompensation and Human Resources Committee; conference calls with management and the independentFinance and Investment Policy Committee; Long-Range registered public accounting firm prior to our earningsand Strategic Planning Committee; and Nominating, releases to discuss quarterly reviews and the fiscalCorporate Governance and Public Policy Committee. year-end audit.
The charters of the Audit Committee, Compensation and Compensation and Human Resources Committee. — TheHuman Resources Committee, and Nominating, responsibilities of this committee are to: i) determine andCorporate Governance and Public Policy Committee are approve the Chief Executive Officer’s compensation andposted on our Web site at www.BestBuy.com — under benefits package; ii) determine and approve executive‘‘Company Information,’’ select the ‘‘For Our Investors’’ and director compensation; iii) appoint officers at thelink and then the ‘‘Corporate Governance’’ link. The level of senior vice president and above, other than thecharters include information regarding the committees’ Chief Executive Officer; iv) oversee incentivecomposition, purpose and responsibilities. compensation, equity-based compensation and other
employee benefit plans; v) oversee our human capitalThe Board has determined that all members of the Audit
policies and programs; and vi) oversee the developmentCommittee, Compensation and Human Resources
of executive succession plans.Committee, and Nominating, Corporate Governanceand Public Policy Committee qualify as independent Finance and Investment Policy Committee. — Thisdirectors as defined under the SEC and NYSE corporate committee advises the Board regarding our financialgovernance rules, as applicable. policies and financial condition to help enable us to
achieve our long-range goals. This committee evaluates
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and monitors the: i) protection and safety of our cash evaluation. It also reviews and recommends to the Boardand investments; ii) achievement of reasonable returns corporate governance principles and presents qualifiedon financial assets within acceptable risk tolerance; individuals for election to the Board. Finally, thisiii) maintenance of adequate liquidity to support our committee oversees the evaluation of the performance ofactivities; iv) assessment of the cost and availability of the Board and each standing committee of the Board.capital; and v) alignment of our strategic goals and For additional information regarding our directorfinancial resources. nomination process, see Director Nomination Process onLong-Range and Strategic Planning Committee. — This page 8.committee works with management to develop ourlong-range plans. These plans may include forming Board Meetings and Attendancestrategic alliances, acquiring other companies,
The Board held five regular meetings and two specialdiversifying or eliminating product lines and expandingmeetings during the fiscal year ended February 26,into new markets. This committee also reviews our2005. Each incumbent director attended, in person orlong-term financial objectives and long-termby telephone, at least 75% of the meetings of both thedevelopment concepts. Additional information on ourBoard and Board committees on which he or she served.strategic planning process is posted on our Web site atThe average attendance by directors at Board andwww.BestBuy.com — under ‘‘Company Information,’’Board committee meetings was 97%. Our Board doesselect the ‘‘For Our Investors’’ link and then thenot have a formal policy relating to Board member‘‘Corporate Governance’’ link.attendance at regular meetings of shareholders;Nominating, Corporate Governance and Public Policyhowever, our directors generally attend the meeting eachCommittee. — This committee discharges the Board’syear. Each of the directors attended the 2004 Regularresponsibilities related to general corporate governance,
including Board organization, membership, training and Meeting of Shareholders.
The following table shows the date each committee was established, the number of meetings held in fiscal 2005 andthe names of the directors serving on each committee as of May 1, 2005.
Number ofMeetings
DuringCommittee Date Established Fiscal 2005 Members
Audit June 1, 1984 17 Hatim A. Tyabji*Robert T. Blanchard
Matthew H. PaullFrank D. Trestman
Compensation and Human Resources February 13, 1997 9 Frank D. Trestman*Kathy J. Higgins Victor
James C. WetherbeFinance and Investment Policy February 13, 1997 10 Elliot S. Kaplan*
Allen U. LenzmeierMatthew H. Paull
Mary A. TolanLong-Range and Strategic Planning February 13, 1997 1 James C. Wetherbe*
Bradbury H. AndersonElliot S. Kaplan
Richard M. SchulzeHatim A. Tyabji
Nominating, Corporate Governance and Public February 13, 1997 7 Robert T. Blanchard*Policy Kathy J. Higgins Victor
Ronald James
* Committee Chairman
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currently seeking to fill an open director position. AllDirector Nomination Processnominations by shareholders should be sent as follows:
The Nominating, Corporate Governance and PublicChairman, Nominating, Corporate Governance andPolicy Committee is responsible for screening andPublic Policy Committeerecommending director candidates to the full Board forc/o Mr. Joseph M. Joycenomination. When there is an opening on the Board,Senior Vice President, General Counsel andthe Nominating, Corporate Governance and PublicAssistant SecretaryPolicy Committee will consider nominations receivedBest Buy Co., Inc.from our shareholders, provided that proposed7601 Penn Avenue Southcandidates meet the requisite director qualificationRichfield, Minnesota 55423standards discussed below. When the Board elects to fill
a vacancy on the Board, the committee will announceDirector Independencethe open position and post any additional search criteria
on our Web site at www.BestBuy.com — under With the adoption of our Corporate Governance‘‘Company Information,’’ select the ‘‘For Our Investors’’ Principles, the Board established independencelink and then the ‘‘Corporate Governance’’ link. When standards in accordance with the requirements of theappropriate, the committee will also engage an SEC and NYSE corporate governance rules, asindependent third-party search firm. The committee will applicable. To be considered independent under thethen evaluate the resumes of any qualified candidates NYSE rules, the Board must affirmatively determine thatrecommended by shareholders and search firms, as well a director or director nominee does not have a materialas by members of the Board. Generally, in order to be relationship with Best Buy (directly, or as a partner,considered for nomination, a candidate must have: shareholder or officer of an organization that has a
relationship with Best Buy). In addition, no director or• High professional and personal ethics and values;director nominee may be deemed independent if the
• A strong record of significant leadership and director or director nomineemeaningful accomplishments in his or her field;
— has in the past three years:• Broad policy-making experience;
• Received (or whose immediate family member• The ability to think strategically; has received as a result of service as an
executive officer) more than $100,000 per year• Sufficient time to carry out the duties of Boardin direct compensation from Best Buy, other thanmembership; anddirector or committee fees and certain pension
• A commitment to enhancing shareholder valuepayments and other deferred compensation;
and representing the interests of all shareholders.• Been an employee of Best Buy;
Candidates are evaluated based on these qualification• Had an immediate family member who was anstandards and the current needs of the Board.
executive officer of Best Buy;All shareholder nominations must be accompanied by a
• Worked on (or whose immediate family membercandidate resume which addresses the extent to whichhas worked on) our audit as a partner or anthe nominee meets the director qualification standardsemployee of our internal or independent auditor,and any additional search criteria posted on our Webor is currently a partner or employee of such firmsite. Nominations will be considered only if we are(or whose immediate family member is currently
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employed in the audit, assurance or tax directors as a group, or the Secretary who serves as thecompliance practice of such firm); or presiding director over the non-management executive
sessions of the Board, are welcome to do so in writing,• Been (or whose immediate family member has
addressed to such person(s) in care of:been) employed as an executive officer ofanother company whose compensation committee Mr. Joseph M. Joycewithin the past three years has included a present Senior Vice President, General Counsel andexecutive officer of Best Buy; or Assistant Secretary
Best Buy Co., Inc.— is currently an employee or executive officer (or has
7601 Penn Avenue Southan immediate family member who is an executive
Richfield, Minnesota 55423officer) of another company that makes payments to BestBuy, or receives payments from Best Buy, for property or Mr. Joyce will forward all written shareholderservices in an amount which, in any single fiscal year, correspondence to the appropriate Board member(s),exceeds the greater of $1.0 million or 2% of such other except for spam, junk mail, mass mailings, customercompany’s consolidated gross revenues. complaints or inquiries, job inquiries, surveys, business
solicitations or advertisements, or patently offensive orUnder our director independence standards described
otherwise inappropriate material. Mr. Joyce may, at hisabove, the Board has determined that each director,
discretion, forward certain correspondence, such aswith the exception of Messrs. Schulze, Anderson,
customer-related inquiries, elsewhere within Best Buy forLenzmeier and Kaplan, is independent. A majority of
review and possible response. Comments or questionsour Board members is independent. The Board based
regarding Best Buy’s accounting, internal controls orthese determinations primarily on a review of the
auditing matters will be referred to members of theresponses of the directors to questions regarding
Audit Committee. Comments or questions regarding theemployment and compensation history, affiliations, and
nomination of directors and other corporate governancefamily and other relationships, and on discussions with
matters will be referred to members of the Nominating,the directors. The Board also reviewed the relationships
Corporate Governance and Public Policy Committee.between Best Buy and companies with which ourdirectors are affiliated.
Director Orientation and Continuing Education
Executive Sessions of Non-Management Our Nominating, Corporate Governance and PublicDirectors Policy Committee oversees the orientation and continuing
education of our directors. Director orientationIn order to promote open discussion among
familiarizes directors with our strategic plans; significantnon-management directors, the Board has a policy of
financial, accounting and risk management issues;conducting executive sessions of non-management
compliance programs and other controls; policies; anddirectors in connection with each regularly scheduled
principal officers and internal auditors, as well as ourBoard meeting, as requested by any non-management
independent registered public accounting firm. Thedirector. The Secretary, who is a non-management
orientation also addresses Board procedures, directors’director, presides over such executive sessions.
responsibilities, our Corporate Governance Principlesand our Board committee charters. We also offerCommunications with the Board of Directorscontinuing education programs to assist the directors in
Shareholders who wish to contact the Board, any maintaining their expertise in these areas.individual director, the non-management or independent
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compensation plan for employees, an option to purchaseCompensation of Directors7,500 shares of Best Buy Common Stock at an exercise
Compensation of our directors is reviewed and price of $53.00 per share under the Best Buy Co., Inc.determined by the Compensation and Human Resources 1997 Directors’ Non-Qualified Stock Option Plan (theCommittee on an annual basis, with consideration given ‘‘1997 Directors’ Plan’’), which is described below. Onto industry comparisons of directors’ compensation. A May 1, 2004, we granted to each of Mr. James andportion of director compensation is linked to our stock Ms. Tolan an option to purchase 7,500 shares of Bestperformance in the form of initial and annual stock Buy Common Stock at an exercise price of $54.25 peroption grants. Employee directors do not receive any share under the 1997 Directors’ Plan. As ofcash compensation for their services as directors. The February 26, 2005, directors, including directors whocash compensation for non-employee directors who are employees of Best Buy, had options outstandingserve during only a portion of a fiscal year is prorated. under the 1997 Directors’ Plan to purchase a total of
639,250 shares of Best Buy Common Stock at exerciseThe cash compensation for the fiscal year endedprices ranging from $2.13 to $54.25 per share. TheFebruary 26, 2005, for each of our non-employeeexercise prices for 1997 Directors’ Plan options weredirectors consisted of:based on the closing prices of Best Buy Common Stock,
• An annual retainer of $40,000 for service as aas quoted on the NYSE, on the dates of grant. During
director, plus expenses;fiscal 2005, Ms. Higgins Victor, and Messrs. Kaplan,
• An annual retainer of $10,000 for serving as Schulze, Trestman, Tyabji and Wetherbe, realizedchairman of the Audit Committee or the appreciation of $121,073, $1,764,900, $1,476,918,Compensation and Human Resources Committee; $305,410, $119,400 and $169,840, respectively, from
the exercise of options.• An annual retainer of $5,000 for serving as
chairman of any committee other than the AuditDirectors’ Non-Qualified Stock Option Plan
Committee or the Compensation and HumanResources Committee; The 1997 Directors’ Plan authorized us to issue options
to purchase a total of 4.2 million shares of Best Buy• $2,000 for each Board meeting attended in
Common Stock. As of February 26, 2005, we hadperson, plus an additional $2,000 per day if a
granted options to purchase a total of 1,216,250 sharesmeeting extends beyond one day;
of Best Buy Common Stock pursuant to this plan.• $1,000 for each Board meeting attended via Options granted pursuant to the 1997 Directors’ Plan
conference call; vested immediately upon grant and can generally beexercised over a 10-year period. During fiscal 2005,• $1,000 for each committee meeting attended inthe 1997 Directors’ Plan was terminated and replacedperson; andby the Best Buy Co., Inc. 2004 Omnibus Stock and
• $500 for each committee meeting attended via Incentive Plan. No further options will be grantedconference call. pursuant to the 1997 Directors’ Plan. However,
outstanding options under this plan will expire at theOn April 19, 2004, we granted each then-servingend of their original term.director, other than management directors who are
eligible to participate in Best Buy’s equity-based
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I T E M 1 — E L E C T I O N O F D I R E C T O R S
under SEC and NYSE corporate governanceGeneral Informationrules, as applicable.
Our Amended and Restated Bylaws provide that the• We have separated the roles of Chairman of theBoard may consist of a maximum of 13 directors, six of
Board and Chief Executive Officer. Thiswhom are designated as Class 1 directors and seven ofseparation allows our Chairman to focuswhom are designated as Class 2 directors. Directors areexclusively on the Board’s oversightelected for a term of two years, and the terms areresponsibilities, while allowing our Chiefstaggered so that Class 1 directors are elected inExecutive Officer to remain focused oneven-numbered years and Class 2 directors are electedmanagement’s execution of company strategies.in odd-numbered years.
• Our Board is very active. Nine of our 12 BoardBoard Structure members had 100% attendance records during
fiscal 2005 (including Board committeeOur Board is committed to having a sound governancemeetings), and the remaining three Boardstructure that promotes the best interests of all Best Buymembers had attendance of at least 85%.shareholders. To that end, our Board has evaluated and
actively continues to examine emerging corporate We believe our current Board structure serves thegovernance trends and best practices. Shareholder interests of shareholders by balancing Board continuityperspectives play an important role in that process. The and the promotion of long-term thinking with the needlevel of importance afforded to shareholder perspectives for director accountability.by our Board is evident upon a closer review of theBoard’s governance structure. Some key points Voting Informationregarding that structure are as follows:
You may vote for all, some or none of the nominees to• We believe that a two-year term structure allows be elected to the Board. However, you may not vote for
our directors to have a longer-term orientation to more individuals than the number nominated. Each ofour business and encourages long-term, strategic the nominees has agreed to continue serving as athinking. At the same time, this structure holds director if elected. However, if any nominee becomesour directors accountable to shareholders, as the unwilling or unable to serve and the Board elects to fillentire Board is subject to re-election as early as the vacancy, the Proxy Agents named in the proxy will53 weeks from any Regular Meeting of vote for an alternative person nominated by the Board.Shareholders. Moreover, we believe that the Our Amended and Restated Articles of Incorporationtwo-year term promotes continuity and fosters an prohibit cumulative voting, which means you can voteappropriate ‘‘institutional memory’’ among Board only once for any nominee. The affirmative vote of amembers. majority of the shares present and entitled to vote at the
Meeting is required to elect each director nominee.• Our Board is predominantly independent. Of our12 directors, only three are Best Buy employees IF YOU RETURN A PROXY CARD THAT IS PROPERLY(including our Chairman of the Board, who is a SIGNED BUT YOU HAVE NOT MARKED YOUR VOTE,founder of Best Buy and our largest shareholder). THAT PROXY WILL BE VOTED TO ELECT ALL OF THEFurther, the Board has affirmatively determined NOMINEES.that eight of its 12 directors are independent
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Mr. James serves on the boards of the Greater TwinBoard Voting RecommendationCities United Way and the St. Paul Travelers Foundation.
Management and the Board recommend thatElliot S. Kaplan, 68, has been a director and Secretaryshareholders vote FOR the re-election of Ronald James,since January 1971. Since 1961, he has been anElliot S. Kaplan, Matthew H. Paull, Richard M. Schulze,attorney with the law firm of Robins, Kaplan, Miller &Mary A. Tolan and Hatim A. Tyabji as Class 2 directors.Ciresi L.L.P., Minneapolis, Minnesota, which serves asIf elected, each will hold office until the election ofour primary outside general counsel. He is also adirectors at the 2007 Regular Meeting of Shareholdersdirector of infoUSA, Inc. and an owner and director ofand until his or her successors have been duly electedthe Bank of Naples in Naples, Florida. In addition, heand qualified, or until his or her earlier death,serves on the board of trustees of The Minneapolisresignation or removal. All of the nominees are currentlyInstitute of Arts and the Executive Committee of themembers of the Board.University of Minnesota Foundation.
Nominees and Directors Matthew H. Paull, 53, has been a director sinceSeptember 2003. He is corporate senior executive viceThere are no family relationships among the nomineespresident and chief financial officer for McDonald’sor between any nominee and any of our other directors.Corporation. Prior to joining McDonald’s Corporation in
On February 8, 2005, Robert T. Blanchard, a Class 2 1993, he was a partner at Ernst & Young LLP,director, notified our Chairman of the Board that he specializing in international tax. He is a trustee of theplanned to retire as a director and not stand for Ravinia Festival Association and an advisory councilre-election at the Meeting. Mr. Blanchard intends to member for the Federal Reserve Bank of Chicago.serve the remainder of his term as a director through the
Richard M. Schulze, 64, is a founder of Best Buy. HeMeeting date. The Board does not currently intend to fillhas been an officer and director from our inception inthe vacancy created by Mr. Blanchard’s retirement.1966 and currently is Chairman of the Board. Effective
Nominees for Class 2 Directors in June 2002, he relinquished the duties of Chief(ages as of February 26, 2005) Executive Officer, an office he had held since
February 1983. He is on the Board of Trustees of theRonald James, 54, has been a director sinceUniversity of St. Thomas, chairman of its Executive andMay 2004. Since 2000, he has served as president andInstitutional Advancement Committee, and a member ofchief executive officer of the Center for Ethical Businessits Board Affairs Committee. Mr. Schulze is alsoCultures (‘‘CEBC’’) in Minneapolis, Minnesota, whichchairman of the Board of Governors of the University ofassists business leaders in building ethical and profitableSt. Thomas Business School.business cultures at the enterprise, community and
global levels. From 1996 to 1998, he was president and Mary A. Tolan, 44, has been a director sincechief executive officer of the Human Resources Group, a May 2004. She is chief executive officer of Accretivedivision of Ceridian Corporation in Minneapolis. From Health, a patient access and revenue cycle service1971 to 1996, he was employed by U.S. West company for health care providers located in Chicago,Communications, Inc. (now Qwest), most recently Illinois. Prior to joining Accretive Health inserving as Minnesota’s top executive officer. He serves November 2003, she was a partner at Accenture Ltd, aon the boards of Tamarack Funds, an investment fund of global management consulting, technology services andRBC Dain Rauscher, Inc.; Bremer Financial Corporation; outsourcing company, holding positions of corporateand Allina Hospitals and Clinics. He is a former director development officer and group chief executive amongof St. Paul Companies (now St. Paul Travelers), Ceridian others. She serves on the council for the GraduateCorporation and Automotive Industries. Finally,
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School of Business at the University of Chicago and on our Vice Chairman. Prior to his promotion to his currentthe board of the Lyric Opera in Chicago. position, he served as President and Chief Operating
Officer from 2002 to 2004, President of Best Buy RetailHatim A. Tyabji, 59, has been a director since
Stores from 2001 to 2002 and as Executive ViceApril 1998. Since July 2001, he has been executive
President and Chief Financial Officer from 1991 tochairman of Bytemobile, Inc., a wireless Internet
2001. He serves on the board of UTStarcom, Inc. He isinfrastructure provider in Mountain View, California.
also a national trustee for the Boys and Girls Clubs ofFrom 1998 to 2000, he served as chairman and chief
America and serves on its Twin Cities board of directors,executive officer of Saraıde, Inc., a provider of Internet
and serves on the board of the Catholic Communityand wireless data services; and from 1986 to 1998, as
Foundation of the Archdiocese of St. Paul andpresident and chief executive officer (and as chairman
Minneapolis. Mr. Lenzmeier has announced his intentionfrom 1992 until 1998) of VeriFone, Inc., a global
to retire at the beginning of our fiscal year 2007, whichtransaction automation enterprise. He is chairman of
commences on February 26, 2006.DataCard Group, and a director of Merchante-Solutions and eFunds. He also serves as Ambassador Frank D. Trestman, 70, has been a director sinceat Large for Benchmark Capital. December 1984. He is president of Trestman Enterprises,
an investment and business development firm inClass 1 Directors — Terms Expire in 2006
Minneapolis, Minnesota, and chairman of The Avalon(ages as of February 26, 2005)
Group, a real estate development company inBradbury H. Anderson, 55, has been a director since Minneapolis. From 1987 to 1989, he was a consultantAugust 1986 and is currently our Vice Chairman and to McKesson Corporation, a distributor ofChief Executive Officer. He assumed the responsibility of pharmaceutical products, and medical supplies andChief Executive Officer in June 2002, having previously equipment. From 1983 to 1987, he was chairman ofserved as President and Chief Operating Officer since the board and chief executive officer of MassApril 1991. He has been employed in various capacities Merchandisers, Inc., a distributor of non-food productswith us since 1973. In addition, he serves on the board to retailers in the grocery business. He is a director ofof the Retail Industry Leaders Association, as well as on Metris Companies, Inc. He is also on the board ofthe boards of the American Film Institute, Junior trustees of the Harry Kay Foundation and served on theAchievement, Minnesota Public Radio and Waldorf board of governors of Abbott Northwestern Hospital inCollege. Minneapolis.
Kathy J. Higgins Victor, 48, has been a director since James C. Wetherbe, Ph.D., 56, has been a directorNovember 1999. She is the founder and president of since July 1993. Since 2000, he has been the StevensonCentera Corporation, an executive development and Professor of Management Information Systems at Texasleadership coaching firm located in Minneapolis, Tech University. Prior to that, he was a professor ofMinnesota. From 1991 to 1994, she was the senior vice management information systems at the University ofpresident of human resources at Northwest Airlines, Inc., Minnesota and the Federal Express professor andand prior to that held senior executive positions at The director of the FedEx Center for Cycle Time Research atPillsbury Company and Burger King Corporation. She is the University of Memphis. He is a leading consultanton the Board of Trustees of the University of St. Thomas. and lecturer on information technology and the author
of 21 books and more than 200 articles in the field ofAllen U. Lenzmeier, 61, has been a director sincemanagement and information systems.February 2001. He joined us in 1984 and is currently
13
was dismissed with prejudice by the U.S. District CourtLegal Proceedingsfor the District of Minnesota on April 12, 2005 and
In fiscal 2004, we were served with a shareholder there will be no appeal of the dismissal. By agreementderivative action venued in Hennepin County District of the parties in the state case, the case has been onCourt, State of Minnesota, alleging that we made inactive status pending the federal court’s decision onmaterial misrepresentations between January 9, 2002, our Motion to Dismiss. If the plaintiffs don’t agree toand August 7, 2002, that resulted in artificially inflated dismiss the state court action voluntarily, then we expectprices of our common stock. The plaintiffs claim the named officer and director defendants to file aviolations of state law relative to fiduciary Motion to Dismiss. Based on our information and belief,responsibilities, control and management of our the claims against the named officer and directorcompany and unjust enrichment, and seek judgment in defendants are without merit and, if necessary, will befavor of Best Buy Co., Inc. against certain named officer vigorously defended.and director defendants for damages, equitable reliefand attorneys’ fees, costs and expenses. A related case
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S E C U R I T Y O W N E R S H I P O F C E R T A I N B E N E F I C I A L O W N E R SA N D M A N A G E M E N T
The following table provides information about the number of shares of Best Buy Common Stock beneficially owned asof February 26, 2005, by the Chief Executive Officer and each of the four other most highly compensated executiveofficers during the most recent fiscal year. The table provides similar information on each director including thedirector nominees, all directors and executive officers as a group, and each person we know who beneficially ownsmore than 5% of the outstanding shares of Best Buy Common Stock:
Number of Shares Percent of SharesName and Address(1) Beneficially Owned Beneficially Owned
Bradbury H. Anderson 3,315,463(2) 1.00%Vice Chairman, Chief Executive Officer and Director
Richard M. Schulze 51,266,568(3) 15.55%Founder and Chairman of the Board
Allen U. Lenzmeier 1,718,356(4) *Vice Chairman and Director
Darren R. Jackson 192,588(5) *Executive Vice President — Finance and Chief Financial Officer
Brian J. Dunn 133,032(6) *President — Retail, North America
Robert T. Blanchard 47,000(7) *Director
Kathy J. Higgins Victor 33,820(8) *Director
Ronald James 8,500(9) *Director
Elliot S. Kaplan 216,332(10) *Secretary and Director
Matthew H. Paull 13,500(11) *Director
Mary A. Tolan 7,500(12) *Director
Frank D. Trestman 225,250(13) *Director
Hatim A. Tyabji 62,000(14) *Director
James C. Wetherbe 49,300(15) *Director
All directors and executive officers, as a group (25 individuals) 58,927,529(16) 17.67%Capital Research & Management Co. 35,491,900(17) 10.81%
333 South Hope StreetLos Angeles, CA 90071
* Less than 1%.
15
(1) The business address for all individuals is 7601 Penn Avenue South, Richfield, Minnesota 55423.
(2) The figure represents (a) 1,232,355 outstanding shares owned by Mr. Anderson; (b) 225,226 outstanding shares held by alimited partnership of which a limited liability company owned by Mr. Anderson and his wife is the sole general partner and ofwhich Mr. Anderson and his wife are limited partners individually; (c) 7,932 outstanding shares registered in the name ofJPMorgan Chase Bank (the ‘‘Trustee’’), and held by the Trustee in connection with Best Buy’s Retirement Savings Plan for thebenefit of Mr. Anderson; (d) 1,200 outstanding shares registered in the name of Mr. Anderson and held by him as custodian forthe benefit of his children (Mr. Anderson has disclaimed beneficial ownership of these shares); and (e) options to purchase1,848,750 shares, which he could exercise within 60 days of February 26, 2005.
(3) The figure represents (a) 181,929 outstanding shares owned by Mr. Schulze; (b) 47,931,859 outstanding shares registered inthe name of Mr. Schulze and a co-trustee, and held by them as trustees of a trust for the benefit of Mr. Schulze; (c) 1,374outstanding shares held in Mr. Schulze’s individual retirement account; (d) 888,611 outstanding shares registered in the name ofMr. Schulze and a co-trustee, and held by them as trustees of the Sandra Schulze Revocable Trust dated June 14, 2001;(e) 633,446 outstanding shares held by a limited partnership of which Mr. Schulze is the sole general partner (Mr. Schulze hasdisclaimed beneficial ownership of these shares except to the extent of his monetary interest therein); (f) 168,208 outstandingshares held by a limited partnership of which a limited liability company owned by Mr. Schulze is the sole general partner(Mr. Schulze has disclaimed beneficial ownership of these shares except to the extent of his monetary interest therein);(g) 21,115 outstanding shares held by a limited partnership of which a limited liability company owned by Mr. Schulze is thesole general partner (Mr. Schulze has disclaimed beneficial ownership of these shares except to the extent of his monetaryinterest therein); (h) 1,150 outstanding shares held by Mr. Schulze’s wife (Mr. Schulze has disclaimed beneficial ownership ofthese shares); (i) 6,102 outstanding shares registered in the name of Mr. Schulze and held by him as trustee of trusts for thebenefit of the children of Mr. Schulze’s wife (Mr. Schulze has disclaimed beneficial ownership of these shares); (j) 118,344outstanding shares owned by The Richard M. Schulze Family Foundation, of which Mr. Schulze is the sole director; (k) 48,805outstanding shares registered in the name of the Trustee, and held by the Trustee in connection with Best Buy’s RetirementSavings Plan for the benefit of Mr. Schulze; and (l) options to purchase 1,265,625 shares, which he could exercise within60 days of February 26, 2005.
(4) The figure represents (a) 1,118,056 outstanding shares owned by Mr. Lenzmeier; (b) 40,300 outstanding shares held by aprivate foundation of which Mr. Lenzmeier and his wife are the sole directors and officers; and (c) options to purchase 560,000shares, which he could exercise within 60 days of February 26, 2005.
(5) The figure represents (a) 40,990 outstanding shares owned by Mr. Jackson; (b) 805 outstanding shares registered in the nameof the Trustee, and held by the Trustee in connection with Best Buy’s Retirement Savings Plan for the benefit of Mr. Jackson; and(c) options to purchase 150,793 shares, which he could exercise within 60 days of February 26, 2005.
(6) The figure represents (a) 14,520 outstanding shares owned by Mr. Dunn; (b) 8,687 outstanding shares registered in the nameof the Trustee, and held by the Trustee in connection with Best Buy’s Retirement Savings Plan for the benefit of Mr. Dunn; and(c) options to purchase 109,825 shares, which he could exercise within 60 days of February 26, 2005.
(7) The figure represents (a) 2,000 outstanding shares owned by Mr. Blanchard; and (b) options to purchase 45,000 shares, whichhe could exercise within 60 days of February 26, 2005.
(8) The figure represents (a) 3,820 outstanding shares owned by Ms. Higgins Victor; and (b) options to purchase 30,000 shares,which she could exercise within 60 days of February 26, 2005.
(9) The figure represents (a) 1,000 outstanding shares owned by Mr. James; and (b) options to purchase 7,500 shares, which hecould exercise within 60 days of February 26, 2005.
(10) The figure represents (a) 141,332 outstanding shares owned by Mr. Kaplan; and (b) options to purchase 75,000 shares, whichhe could exercise within 60 days of February 26, 2005.
(11) The figure represents (a) 1,000 outstanding shares owned by Mr. Paull; and (b) options to purchase 12,500 shares, which hecould exercise within 60 days of February 26, 2005.
(12) The figure represents options to purchase 7,500 shares, which Ms. Tolan could exercise within 60 days of February 26, 2005.
(13) The figure represents (a) 112,250 outstanding shares owned by Mr. Trestman; (b) 50,000 outstanding shares registered in thename of Mr. Trestman’s wife as trustee of an irrevocable family trust (Mr. Trestman has disclaimed beneficial ownership of theseshares); and (c) options to purchase 63,000 shares, which he could exercise within 60 days of February 26, 2005.
(14) The figure represents (a) 5,000 outstanding shares owned by Mr. Tyabji; and (b) options to purchase 57,000 shares, which hecould exercise within 60 days of February 26, 2005.
(15) The figure represents (a) 11,800 outstanding shares held in Dr. Wetherbe’s individual retirement account; and (b) options topurchase 37,500 shares, which he could exercise within 60 days of February 26, 2005.
16
(16) The figure represents (a) outstanding shares and options described in the preceding footnotes; (b) 223,344 outstanding sharesowned by other executive officers; (c) options granted to other executive officers to purchase 928,508 shares, which they couldexercise within 60 days of February 26, 2005; (d) 13,552 outstanding shares registered in the name of the Trustee, and heldby the Trustee in connection with Best Buy’s Retirement Savings Plan for the benefit of other executive officers; (e) 380,909outstanding shares registered in the name of another executive officer as trustee of trusts for the benefit of such executive officer;(f) 87,298 outstanding shares registered in the name of another executive officer as trustee of trusts for the benefit of suchexecutive officer’s children; (g) 1,600 outstanding shares registered in the names of other executive officers’ spouses; and (h)3,109 outstanding shares registered in the name of the Trustee, and held by the Trustee in connection with Best Buy’s RetirementSavings Plan for the benefit of an executive officer’s spouse.
(17) As reported on the owner’s Schedule 13G that reported beneficial ownership as of January 31, 2005.
S E C T I O N 1 6 ( a ) B E N E F I C I A L O W N E R S H I P R E P O R T I N GC O M P L I A N C E
Section 16(a) of the Securities Exchange Act of 1934 all Section 16(a) reports that they file with the SEC.requires that our directors, executive officers and Based solely on our review of such Section 16(a)shareholders who own more than 10% of our Common reports, management and the Board believe ourStock file initial reports of ownership with the SEC and directors, officers and owners of more than 10% of ourthe NYSE. They must also file reports of changes in outstanding equity securities complied with the reportingownership with the SEC and the NYSE. In addition, they requirements during the fiscal year ended February 26,are required by SEC regulations to provide us copies of 2005.
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E X E C U T I V E C O M P E N S A T I O N
Executive Compensation PhilosophyCompensation and Human ResourcesCommittee Report on Executive Compensation Our executive compensation programs are guided by
the following principles:Overview
• Compensation should be directly and materiallyThe Compensation and Human Resources Committee islinked to increasing shareholder value;responsible for, among other things, the development
and evaluation of our executive compensation policies • Compensation should be fairly balanced betweenand determining the compensation paid to our Chief cash and equity-based components to createExecutive Officer and other executive officers. strong individual motivation and alignment with
shareholder interests;The committee oversees the management andadministration of all executive compensation programs, • Compensation should be competitive in order toincluding our qualified and non-qualified employee attract and retain superior management talent;benefit plans. We currently maintain a variety of
• The ratio of variable to fixed compensationcompensation and benefit plans in which our executive
should increase with the level of responsibilityofficers and other selected employees participate. These
within the organization; andplans include the 2004 Omnibus Stock and IncentivePlan (the ‘‘2004 Omnibus Plan’’); our Long-Term • Compensation should reflect performance againstIncentive Program (the ‘‘LTIP’’); our Executive Officer external benchmarks and attainment of internalShort-Term Incentive Program (the ‘‘Executive Officer goals.STIP’’); our Short-Term Incentive Program (the ‘‘STIP’’);
Consistent with these principles, the compensation of ourand the Best Buy Fourth Amended and Restated
executive officers is weighted toward annual incentivesDeferred Compensation Plan (the ‘‘Deferred
and long-term incentives. The mix of base salary, annualCompensation Plan’’). We also maintain the Best Buy
incentives and long-term incentives is consistent with ourRetirement Savings Plan (the ‘‘Retirement Savings Plan’’),
philosophy of providing competitive compensationwhich is a defined contribution retirement plan in which
overall and enhanced compensation for superiorsubstantially all U.S.-based employees, including our
performance.executive officers, are eligible to participate. Finally, we
The committee annually reviews and evaluates thesponsor the Best Buy Co., Inc. 2003 Employee Stockcompensation and benefits of our executive officers. InPurchase Plan (the ‘‘ESPP’’), which is intended to qualifyits review, the committee considers market compensationas an ‘‘Employee Stock Purchase Plan’’ underand benefits data from a variety of sources, includingSection 423 of the Internal Revenue Code of 1986 (theour peer group of companies and several national‘‘Code’’).compensation surveys. The data from these sources and
Our Chairman of the Board is not eligible to receiveour compensation programs are reviewed by an
annual or long-term incentive compensation other thanindependent compensation consultant, retained by the
stock options granted annually to our directors. Hiscommittee. This review ensures that the market data
compensation is described in Certain Relationships andrepresent companies with which we compete for
Related Party Transactions — Richard M. Schulze onbusiness and executive talent, and that our
page 27.compensation programs are in line with our statedobjectives and market conditions.
18
Executive Compensation Programs approved by the committee; ii) actual companyperformance as compared with goals approved by the
The components of our executive officer compensation,committee regarding our selling, general and
which are subject to the discretion of the committee onadministrative expenses (‘‘SG&A’’) rate, operating
an individual basis, include base salary, an annualincome rate, customer centricity store revenue, return on
incentive, long-term incentives, broad-based employeeinvested capital (‘‘ROIC’’), customer loyalty improvement
benefits and miscellaneous perquisites. We believe the(‘‘Loyalty’’) and employee engagement (‘‘Viewpoint’’);
sum of these components provides a total compensationand iii) individual performance based on achieving
package that is comparable to that provided at our peergoals related to each executive officer’s operational or
group of companies, and at comparable companiesfunctional responsibilities. Based on actual performance
within the retail industry and general industry.compared with specific established goals, award
Base Salary. The committee generally determines base recipients could earn an incentive amount from 0% tosalary levels for executive officers early in the fiscal 200% of their incentive target.year, with pay changes becoming effective during the
EVA measures the amount by which our after-tax profits,first quarter of each fiscal year. Salaries are established
after certain adjustments, exceed our cost of capital. Allby considering the following factors: i) the range of base
short-term incentive awards were subject to thepay for the position or a similar position as reported by
attainment of a minimum level of total company EVAcompanies within our defined competitive market;
performance. We believe our use of EVA as a primaryii) individual performance for the prior year; iii) overall
incentive factor demonstrates our commitment to linkingcompany performance for the prior year; and
executive compensation with increasing shareholderiv) additional responsibilities assigned to the position
value.based on individual skills, experience and the leadershipneeds of our core, emerging and new businesses. Base Long-Term Incentives: Annual Awards. Under the LTIP,salaries for our executive officers are generally set at the we make annual stock option and performance-based50th percentile of salaries reported in the market data restricted stock awards to our executive officers andfor comparable positions. other eligible employees in the third quarter of each
fiscal year. The objectives of the LTIP are to encourageAnnual Incentive. For fiscal 2005, our executive
long-term performance and employee ownership of ourofficers received performance-based short-term incentive
stock. All awards granted pursuant to the LTIP wereawards, pursuant to the Executive Officer STIP. These
made under the 2004 Omnibus Plan.awards, payable in cash, were expressed as apercentage of each executive officer’s base salary. The In fiscal 2005, we awarded non-qualified stock optionshort-term incentive targets for our Chief Executive awards pursuant to the LTIP. The stock options have aOfficer and our Vice Chairman (previously our President term of ten years and become exercisable over aand Chief Operating Officer) were 150% and 100% of four-year period at the rate of 25% per year, beginningbase salary, respectively. For all other executive officers, one year from the date of grant. The option exercisethe incentive targets ranged from 65% to 75% of base price is equal to the closing price of our Common Stock,salary. The incentive targets were determined based on as quoted on the NYSE, on the grant date.each executive officer’s level of responsibility compared
In fiscal 2005, we also made performance-basedexternally to the competitive market data and internally
restricted stock awards pursuant to the LTIP. The awardsrelative to other executive officers.
will vest after a three-year incentive period if ourThese incentive awards were based on three Common Stock achieves a certain total shareholderperformance factors: i) actual company Economic Value return (‘‘TSR’’) as compared to the TSR of companies thatAdded (‘‘EVA�’’) performance as compared with a goal comprise the Standard & Poor’s 500 Index (the ‘‘Broad
19
Market Index’’). TSR is the compound annual growth Long-Term Incentives: Special Awards. In addition torate that shareholders receive on their investment, the annual awards of non-qualified stock options forincluding both paid dividends and stock price fiscal 2005 made pursuant to the LTIP, the committeeappreciation. The following is a summary of restricted approved a discretionary award of options to purchasestock award vesting based on varying levels of Best Buy 591,700 shares of our Common Stock to 2,014TSR performance in relation to the TSR performance of employees for special achievements. The discretionarythe Broad Market Index: stock option grants were made under the 2004
Omnibus Plan with the same terms and conditions% of Restricted
Best Buy TSR Versus TSR of Broad Market Stock Award applicable to the annual stock option awards. Of theIndex Over 3-Year Incentive Period that will Vest
total discretionary options granted during fiscal 2005,TSR Above the 75th Percentile 100%-200% options to purchase 3,665 shares were granted toTSR Between the 50th and 75th
executive officers.Percentile 1%-99%
Fiscal 2006 IncentivesTSR Below the 50th Percentile 0%
Annual Incentive. On April 18, 2005, the committeeEligibility for awards under the LTIP is limited toapproved performance-based short-term incentiveexecutive officers, senior management employees,awards for our executive officers, conditioned on thecorporate and field management employees, and storeachievement of specified performance goals for fiscalmanagers—totaling approximately 2,800 employees. As2006. The awards were made pursuant to the Executivedescribed below, no LTIP awards were made to ourOfficer STIP under the 2004 Omnibus Plan.Chief Executive Officer in fiscal 2005. The fiscal 2005
LTIP award for our Vice Chairman (previously our The short-term incentive awards are conditioned onPresident and Chief Operating Officer) was delivered three performance goals: i) actual company EVAentirely in the form of stock options. For all other performance for fiscal 2006 compared with a goalexecutive officers, three-fourths of the total LTIP award approved by the committee; ii) actual companyvalue in fiscal 2005 was in the form of stock options, performance as compared with goals approved by thewith the remainder in the form of restricted stock. For all committee regarding our fiscal 2006 operating incomeother LTIP participants, half of the total award value was rate, customer centricity store revenue, customer loyaltyin the form of stock options and half was in the form of scores and employee turnover improvement; andrestricted stock. The mix of stock options and restricted iii) individual performance based on achieving fiscalstock is intended to achieve an appropriate balance 2006 goals related to each executive officer’sbetween risk and reward. operational or functional responsibilities.
The amount of LTIP awards for executive officers is The actual incentive amount for each executive officer,generally set between the 50th to 60th percentile of grant payable in cash, will be an amount ranging from 0% topractices, on an expected value basis, of our peer group 200% of the executive officer’s short-term incentiveof companies, as well as comparable companies within target, based on actual performance compared with thethe retail industry and general industry. The specific specific goals established by the committee. The short-amount of an executive officer’s award is proposed by term incentive targets for our Chief Executive Officermanagement based on the officer’s position, an and our Vice Chairman (previously our President andassessment of his or her talent, and his or her Chief Operating Officer) are 150% and 100% of basedemonstration of company values. The proposed awards salary, respectively. For all other executive officers, theto LTIP participants are subject to review and approval short-term incentive targets range from 65% to 75% ofby the committee. base salary.
20
Long-Term Incentives. In fiscal 2006, we intend to Annual Incentive. Mr. Anderson’s annual incentivecontinue to award a mix of non-qualified stock options compensation for fiscal 2005 was determined by theand performance-based restricted stock awards pursuant performance-based incentive award he receivedto the LTIP under the 2004 Omnibus Plan to our pursuant to the Executive Officer STIP under the 2004executive officers. For our Chief Executive Officer and Omnibus Plan. The performance factors used toour Vice Chairman (previously our President and Chief determine his incentive award are described beginningOperating Officer), the fiscal 2006 long-term incentives on page 19. With respect to the EVA, SG&A rate,are all expected to be in the form of stock options. For operating income rate, and customer centricity storeour other executive officers, three-fourths of the revenue and ROIC factors, our actual results for fiscallong-term incentives are expected to be in the form of 2005 exceeded the minimum required levels ofstock options and the remainder are expected to be in performance but did not meet the level needed to earnthe form of restricted stock awards with performance- the full incentive target. With respect to the Loyalty andbased vesting over a three-year period. We expect that Viewpoint factors, we met or exceeded the establishedthe classes of eligible employees in fiscal 2006 will be target levels of performance. Our fiscal 2005 results andthe same as the classes of eligible employees in fiscal Mr. Anderson’s individual performance, as determined2005. by the committee, resulted in an overall incentive
multiplier of 0.72, or 72% of the incentive target. TheChief Executive Officer Compensation
amount of the annual incentive earned by Mr. AndersonMr. Anderson has served as our Vice Chairman and was $1,210,302 and was paid in cash in May 2005.Chief Executive Officer since June 2002. The base
Long-Term Incentives. In lieu of granting Mr. Andersonsalary, annual incentive and long-term incentives paid to
an LTIP award in fiscal 2005, the committee honored hisMr. Anderson in fiscal 2005 were determined in
request to contribute options to purchase 200,000accordance with the guidelines described above, and his
shares to a discretionary award pool. The committeecompensation consists of the same elements as all other
used the options that would have otherwise beenexecutive officers. The committee’s process for evaluating
awarded to Mr. Anderson to grant stock option awards,the Chief Executive Officer’s performance includes a
at its sole discretion, to non-executive employees asself-evaluation and a performance evaluation by both
described on page 20 under Long-Term Incentives:the committee and the Board of the Chief Executive
Special Awards. As explained more generally aboveOfficer’s performance against specific financial,
with respect to all executive officers, the committeenon-financial and strategic goals. After the committee
awards long-term incentives to the Chief Executivediscusses these evaluations, the overall performance
Officer that fall within the 50th to 60th percentile of grantevaluation is finalized and the Chairman of the
practices, on an expected value basis, of our peer groupcommittee reviews the results and commentary with the
of companies and comparable companies within theChief Executive Officer.
retail industry and general industry.Base Salary. The committee set Mr. Anderson’s base
We believe Mr. Anderson’s total compensation for fiscalsalary at $1,127,880, effective May 2004. This was an
2005 is in alignment with the compensation principlesincrease from his previous base salary of $1,084,500,
expressed in our Executive Compensation Philosophy,and was based on our Executive Compensation
which is described on page 18. For fiscal 2005, wePhilosophy, which is described on page 18, and
achieved 13% EVA growth, generated double-digitMr. Anderson’s performance against established goals
revenue growth, outperformed most consumer electronicsfor fiscal 2004. These goals included EVA growth,
retailers in comparable store sales, reduced our SG&Arevenue growth, TSR and operating income rate.
rate and sustained our customer loyalty scores. However,
21
our TSR performance for fiscal 2005 was -2.2%, as regularly reviews with management the executivecompared with an average 7.0% TSR for the companies officers’ compliance with the targeted level of stockincluded in the Broad Market Index. ownership. Based on these reviews, the committee is
satisfied with the executive officers’ fiscal 2005Perquisites
compliance with their individual ownership targets.We prefer to compensate our executive officers in cash
Compliance with Section 162(m) of the Internal Revenueand equity rather than with perquisites. Consequently,
Codethe value of executive perquisites falls within the bottomquartile of the market data for comparable companies Section 162(m) of the Code limits the deductibility ofwithin the retail industry and the general industry. We compensation in excess of $1 million paid to the Chiefreimburse our executive officers for tax preparation Executive Officer or any of the four other most highlyservices and executive physicals. In addition, each of compensated executive officers, unless suchour Chairman of the Board, Chief Executive Officer and compensation qualifies as ‘‘performance-basedVice Chairman (previously our President and Chief compensation.’’ Among other things, in order to beOperating Officer) receive a monthly car allowance of deemed performance-based compensation, the$500. Our leased aircraft are also available to compensation must be based on the achievement ofexecutives, as well as other employees, for business pre-established, objective performance criteria and musttravel. Our policy is to permit use of such aircraft on be pursuant to a plan that has been approved by ourlimited occasions by executives’ family members as long shareholders. The committee expects that allas there is no incremental cost to us. In all cases, the performance-based compensation paid in fiscal 2005 toperquisites provided to any executive officer do not our executive officers under the plans and programsexceed the lesser of $50,000 or 10% of the executive described above will qualify for deductibility, eitherofficer’s base salary. because the compensation is below the threshold for
non-deductibility provided in Section 162(m), or becauseStock Ownership Guidelines
the payment of amounts in excess of $1 million qualifyWe have established stock ownership guidelines for our as performance-based compensation pursuant to theofficers and directors. Each officer must own the number provisions of Section 162(m).of shares of our Common Stock that is equivalent in
The committee believes that it is important to continue tovalue to: i) five times base salary for the Chairman of
be able to take all available tax deductions with respectthe Board and the Chief Executive Officer; ii) four times
to the compensation paid to its executive officers.base salary for the Vice Chairman (previously our
Therefore, we have taken such actions as may bePresident and Chief Operating Officer); iii) three times
necessary under Section 162(m) to continue to qualifybase salary for Executive Vice Presidents and Presidents
for all available tax deductions related to executiveof our subsidiaries; iv) two times base salary for Senior
compensation.Vice Presidents; and v) one times base salary for VicePresidents. In addition, our non-employee directors are COMPENSATION AND HUMANrequired to own the number of shares of Common Stock RESOURCES COMMITTEEthat is equivalent in value to five times their annual cash
Frank D. Trestman, Chairmanretainer. Newly appointed directors and officers have
Kathy J. Higgins Victorfive years from the date of appointment to achieve the
James C. Wetherbeapplicable level of stock ownership. The committee
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Summary Compensation Table
The following table shows the cash and non-cash compensation for each of the last three fiscal years awarded to orearned during the period by our Chief Executive Officer and the other four most highly compensated executiveofficers.
Long-Term CompensationNumber of
Securities RestrictedAnnual Compensation(1)Fiscal Underlying Stock All Other
Name and Title Year Base Salary Bonus(2) Options Awards(3) Compensation(4)
Bradbury H. Anderson 2005 $1,120,372 $1,210,302 — $ — $ 9,325Vice Chairman and Chief 2004 1,078,529 2,090,078 — — 6,951Executive Officer 2003 951,865 682,343 300,000 — 13,956
Richard M. Schulze 2005 1,000,000 — — — 11,683Founder and Chairman of the 2004 1,000,000 — — — 11,179Board 2003 1,017,308 903,750 127,500 — 29,901
Allen U. Lenzmeier 2005 853,478 648,805 100,000 — 12,040Vice Chairman 2004 821,626 955,335 100,000 — 11,763
2003 800,000 411,400 200,000 — 13,603
Darren R. Jackson 2005 514,136 293,139 31,500 289,223(5) 6,026Executive Vice President — 2004 479,129 668,708 31,500 1,936,245(6) 5,930Finance and Chief Financial 2003 395,385 246,090 63,725 — 7,575Officer
Brian J. Dunn 2005 485,444 253,901 31,500 289,223(7) 6,267President — Retail, North 2004 395,713 419,469 34,500 341,435(8) 4,985America 2003 364,952 232,580 63,725 — 498
(1) Our Deferred Compensation Plan allows certain employees to defer a portion of their base salary and cash bonuses. Prior toJanuary 1, 2004, this plan also provided for employer matching contributions which, when combined with the employer matchunder our Retirement Savings Plan, did not exceed the maximum allowable employer contribution under federal law. Amountsshown as Base Salary and Bonus are before any deferrals.
(2) For fiscal 2005, all of our executive officers participated in our Executive Officer STIP. The Executive Officer STIP is described inCompensation and Human Resources Committee Report on Executive Compensation, beginning on page 18. For fiscal 2004,our Chief Executive Officer and our Vice Chairman (previously our President and Chief Operating Officer) participated in theExecutive Officer STIP, while our other executive officers participated in our STIP. For fiscal 2003, all of our executive officersparticipated in a shareholder-approved incentive compensation plan pursuant to which incentives were determined based onour EVA achievement and achievement of individual performance goals.
(3) Reflects shares issued under our 2000 Restricted Stock Award Plan, as amended, or our 2004 Omnibus Plan. The value ofrestricted stock awards was calculated by multiplying the closing price as quoted on the NYSE of Best Buy Common Stock on thedate of award by the number of shares awarded. Values are reported at target payout levels, but higher or lower payouts arepossible. These restricted stock awards are entitled to receive dividend payments.
As of February 25, 2005, the last trading day of fiscal 2005, the aggregate number and value of unvested restricted stockholdings, based on the market value of Best Buy Common Stock on that date, were as follows: Mr. Jackson — 35,500 shares,$1,834,995; and Mr. Dunn — 11,000 shares, $568,590.
23
(4) Includes the portions of premiums paid by us for life insurance coverage exceeding $50,000 (‘‘A’’), our contribution to theexecutive’s Retirement Savings Plan account (‘‘B’’), our contributions to the executive’s Deferred Compensation Plan account (‘‘C’’),and the premiums paid by us for split-dollar life insurance (‘‘D’’), as follows:
Fiscal Year ‘‘A’’ ‘‘B’’ ‘‘C’’ ‘‘D’’
Bradbury H. Anderson 2005 $ 4,902 $ 4,423 $ — $ —2004 2,779 4,172 — —2003 1,146 4,943 867 7,000
Richard M. Schulze 2005 7,524 4,159 — —2004 7,219 3,849 111 —2003 3,290 2,887 2,424 21,300
Allen U. Lenzmeier 2005 7,524 4,516 — —2004 7,124 4,208 431 —2003 2,143 4,435 2,025 5,000
Darren R. Jackson 2005 815 5,211 — —2004 947 2,478 2,505 —2003 449 1,599 5,528 —
Brian J. Dunn 2005 840 5,427 — —2004 867 4,118 — —2003 498 — — —
(5) The amount is comprised of the fiscal 2005 incentive of 5,250 shares of restricted stock with performance-based vestingawarded pursuant to our Long-Term Incentive Program, which shares will vest after a three-year incentive period beginning onthe award date of October 11, 2004, if our Common Stock achieves a certain total shareholder return.
(6) The amount is comprised of the fiscal 2004 incentive of: i) 5,250 shares of restricted stock with performance-based vestingawarded pursuant to our Long-Term Incentive Program, which shares will vest after a three-year incentive period beginning onthe award date of November 3, 2003, if our Common Stock achieves a certain total shareholder return; ii) 20,000 shares ofrestricted stock that will vest after a three-year incentive period beginning on the award date of December 4, 2003, if weachieve a stated Company performance goal; iii) 2,500 shares of restricted stock that vested immediately on the award date ofDecember 4, 2003; and iv) 7,500 shares of restricted stock that vest in three equal annual installments beginning onDecember 4, 2004.
(7) The amount is comprised of the fiscal 2005 incentive of 5,250 shares of restricted stock with performance-based vestingawarded pursuant to our Long-Term Incentive Program, which shares will vest after a three-year incentive period beginning onthe award date of October 11, 2004, if our Common Stock achieves a certain total shareholder return.
(8) The amount is comprised of the fiscal 2004 incentive of 5,750 shares of restricted stock with performance-based vestingawarded pursuant to our Long-Term Incentive Program, which shares will vest after a three-year incentive period beginning onthe award date of November 3, 2003, if our Common Stock achieves a certain total shareholder return.
Stock Option Grants in Fiscal 2005
The following table summarizes the options granted to the Chief Executive Officer and the four other most highlycompensated executive officers of Best Buy during the fiscal year ended February 26, 2005. They also show the valueof all options held by these individuals at the end of fiscal 2005.
Individual Grants% of Total
Options Potential Realizable ValueNumber of Granted to at Assumed Annual Rates of StockSecurities Employees Exercise Price Appreciation for Option TermUnderlying in Fiscal Price ExpirationOptions 2005 ($/Share) Date 5% 10%
Bradbury H. Anderson — — — — — —Richard M. Schulze 7,500(1) 0.20% $53.00 4-18-14 $ 250,000 $ 634,000Allen U. Lenzmeier 100,000(2) 2.65 55.09 10-10-14 3,465,000 8,780,000Darren R. Jackson 31,500(2) 0.83 55.09 10-10-14 1,091,000 2,766,000Brian J. Dunn 31,500(2) 0.83 55.09 10-10-14 1,091,000 2,766,000
24
The price of one share of Best Buy Common Stock acquired at $53.00 and $55.09 would equal approximately$86.33 and $89.74, respectively, when compounded at 5% over a 10-year term, and $137.47 and $142.89,respectively, when compounded at 10% over a 10-year term.(1) Number of shares issuable upon the exercise of options granted on April 19, 2004, under the Best Buy Co., Inc. 1997
Directors’ Non-Qualified Stock Option Plan, as amended. The options are fully exercisable as of the date of grant and have a10-year term.
(2) Number of shares issuable upon the exercise of options granted on October 11, 2004, under the Best Buy Co., Inc. 2004Omnibus Stock and Incentive Plan. The options are exercisable 25% per year beginning one year after the date of grant andhave a 10-year term.
Option Exercises During Fiscal 2005 and Value of Options at End of Fiscal 2005
Number of SecuritiesUnderlying Unexercised Value of Unexercised
Options at End of In-the-Money Options at EndShares Fiscal 2005 of Fiscal 2005(1)Acquired Realized
Name on Exercise Value(1) Exercisable Unexercisable Exercisable Unexercisable
Bradbury H. Anderson — — 1,736,250 206,250 $54,917,213 $1,733,438Richard M. Schulze 480,000 $22,721,232 1,140,000 157,500 10,072,463 1,398,338Allen U. Lenzmeier 225,000 10,923,750 494,375 303,125 4,079,106 1,018,469Darren R. Jackson — — 131,705 95,145 1,572,724 358,719Brian J. Dunn 32,343 1,518,647 90,737 97,395 957,985 358,719(1) Value based on the market value of Best Buy Common Stock on the date of exercise or at the end of fiscal 2005, as applicable,
minus the exercise price.
Equity Compensation Plan Information
The following table provides information about Best Buy Common Stock that may be issued under our equitycompensation plans as of February 26, 2005.
Securities to be Issuedupon Exercise of
OutstandingOptions, Warrants Weighted Average Securities Available for
Plan Category and Rights(1) Exercise Price Future Issuance(2)
Equity compensation plans notapproved by security holders NA NA NA
Total 26,798,962 $40.05 15,916,212
(1) Includes options held by certain employees of our former Musicland business resulting from the conversion of Musicland optionsinto options to purchase Best Buy Common Stock. These options were fully vested at the time of conversion, do not terminateupon termination of employment with us and expire based on the remaining option term of up to 10 years. These options didnot reduce the shares available for grant under any of our other option plans.
(2) Includes 4.2 million shares of Best Buy Common Stock which have been reserved for issuance under the Best Buy Co., Inc. 2003Employee Stock Purchase Plan.
25
Retirement Plans Deferred Compensation Plan
Our Retirement Savings Plan is intended to meet the We sponsor a non-qualified, unfunded Deferredrequirements of Section 401(k) of the Code. The Compensation Plan. This plan is administered by theRetirement Savings Plan is available to employees of committee. Only certain management and other highlyBest Buy and its participating subsidiaries who are at compensated employees, as determined by theleast 18 years of age and have at least 60 days of committee at its sole discretion, and members of thecontinuous employment. In addition, the employees must Board can participate in this plan. A participant maywork at least 32 hours per week or work fewer than elect to defer up to 75% of his or her base salary and32 hours per week and have completed at least 100% of his or her incentive compensation and/or1,000 hours of service in a 12-month period. Eligible director fees. Prior to January 1, 2004, the Deferredemployees may choose to contribute up to 50% of their Compensation Plan provided for employer matchingpre-tax earnings, subject to certain limitations. Employee contributions which, when combined with employercontributions vest immediately. matching contributions under the Retirement Savings
Plan, did not exceed the maximum allowable employerWe match employee contributions at rates as determined
contribution under federal law. Amounts deferred underfrom time to time by the Board. During the fiscal year
and contributed to the Deferred Compensation Plan areended February 26, 2005, the employer match was
credited or charged with the performance of the50% of the first 5% of participating employees’ pre-tax
investment options offered under the Deferredearnings. The employer matching contributions vest
Compensation Plan and elected by the participants.according to a five-year schedule. For fiscal 2005, the
Investment options do not represent actual investments,total matching contribution was $14 million, including
but rather a measurement of performance.$23,736 in the aggregate for the Chief ExecutiveOfficer and the four other most highly compensated Participants in the Deferred Compensation Plan can electexecutive officers. to receive distributions from the plan at retirement or
earlier as permitted by the plan. Participants are fullyAlthough we currently intend to continue the Retirement
vested in their contributions and vest in any employerSavings Plan, as well as to make matching contributions,
contributions according to a five-year schedule providedthe Board may terminate the plan or discontinue the
in the Deferred Compensation Plan. We discontinued thematching contribution at its sole discretion. If the
employer matching contribution to this plan, effectiveRetirement Savings Plan were to be terminated, the
January 1, 2004. If the Deferred Compensation Planparticipants would become fully vested in all of the
were to be terminated, the participants would becomematching funds contributed by us up to that time.
fully vested in all of the matching funds contributed byJPMorgan Chase has served as the trustee for the
us up to that time. In the event of bankruptcy, the assetsRetirement Savings Plan since April 1, 2004.
of this plan are available to satisfy the claims of generalOne of our subsidiaries, Best Buy Canada Ltd., has a creditors.separate retirement plan for its employees. Employees ofBest Buy Canada Ltd. are not eligible to participate inthe Retirement Savings Plan.
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C E R T A I N R E L A T I O N S H I P S A N D R E L A T E D P A R T YT R A N S A C T I O N S
members of the Board who have no financial interest inRichard M. Schulzethe transaction. Prior to Board approval, the Finance
In June 2002, Richard M. Schulze, a Founder of Best and Investment Policy Committee must first determineBuy and our Chairman of the Board, relinquished his that any real estate transaction with an insider has termsduties as our Chief Executive Officer. At that time, we that are competitive with terms available fromentered into an arrangement with Mr. Schulze to pay unaffiliated third parties.him an annual salary of $1 million, with annual
We also lease, on a non-exclusive basis, airplanes fromincreases based on the consumer price index, for asa corporation owned by the Richard M. Schulzelong as he is physically and mentally proficient to act asRevocable Trust, of which Mr. Schulze is a trustee.Chairman, subject to his election as a director by ourPeriodically, the Board reviews the terms of the leaseshareholders. We reimburse Mr. Schulze for business-agreement to ensure that they are no less favorable thanrelated expenses. During the fiscal year endedterms available from unaffiliated third parties. We payFebruary 26, 2005, we also reimbursed himan hourly rate for use of the airplanes, without anyapproximately $11,000 in the aggregate for anrequired fractional ownership. Our senior managementautomobile expense allowance and a country clubgenerally use the airplanes when it is more economicalmembership. We also provide health insurance benefitsor practical than flying commercial airlines. The totalfor Mr. Schulze and his spouse. Mr. Schulze continues toamount paid to Mr. Schulze’s corporation for use of theparticipate in our Deferred Compensation Plan and isairplanes during fiscal 2005 was approximatelyeligible to receive the stock options granted annually to$380,000.our directors. Mr. Schulze is not eligible to participate in
any of our other incentive compensation programs or We purchase certain store fixtures from Phoenixthe Employee Stock Purchase Plan. Fixtures, Inc. (‘‘Phoenix’’), a company owned by
Mr. Schulze’s brother. The decision to conduct businessWe lease two of our U.S. Best Buy stores fromwith Phoenix was based on both qualitative andMr. Schulze. Aggregate rents paid for the two storesquantitative factors including product quality, pricing,leased from Mr. Schulze during fiscal 2005, werecustomer service and design flexibility. The Boardapproximately $950,000. The leases include escalationreviewed our transactions with Phoenix and determinedclauses and one provides for percentage rent based onthat the transactions were at arm’s length and thatgross sales. The leases expire in 2006, but can bePhoenix provides significant advantages with respect torenewed through 2021 at our option. We entered intoservice and delivery. Accordingly, the Board hasboth of the real estate leases with Mr. Schulze prior toapproved the transactions and our continued business1990, and the Board negotiated and approved thedealings with Phoenix. The total amounts paid toleases (with Mr. Schulze not voting). The Board relied onPhoenix during fiscal 2005 were approximatelyone or more of its members who had no financial$20 million.interest in the properties to review market comparisons,
look into alternative rental agreements and negotiate Susan S. Hoff, our Senior Vice President and Chiefwith Mr. Schulze. The Board decided that these real Communications Officer, is Mr. Schulze’s daughter.estate leases were in our best interest. During fiscal 2005, Ms. Hoff received approximately
$530,000 in base salary and short-term incentives, andWe have a policy of not participating in real estatewas awarded options to purchase 16,150 shares of Besttransactions with officers, directors, controlling personsBuy Common Stock at a price of $55.09 per share andand other insiders unless they are approved by the
27
2,755 restricted shares. The stock options expire in The Board periodically reviews the fees paid to RKMC toOctober 2014, and the restricted shares vest over a ensure that they are competitive with fees charged bythree-year period in a range from 0% to 200% based other law firms comparable in size and expertise. Weon our achievement of certain performance goals during paid approximately $5.5 million in legal fees to RKMCsuch period. during the fiscal year ended February 26, 2005. In
addition, RKMC earned a contingent fee of $5.6 millionBefore his resignation in December 2004, Duane D.
in connection with the settlement of our claims againstHoff served as our Vice President — Business
two credit card companies, which we believe resulted inDevelopment. Mr. Hoff is Mr. Schulze’s son-in-law.
a significantly greater recovery for us than we wouldDuring fiscal 2005, Mr. Hoff received approximately
have received if we had not opted out of a related class$160,000 in base salary and short-term incentives and
action lawsuit against the same defendants. The Boardwas awarded options to purchase 5,985 shares of Best
had approved the transactions with RKMC and ourBuy common stock at a price of $55.09 per share and
continued business dealings with the firm.950 restricted shares. The stock options and therestricted shares were canceled upon his resignation. Jane K. Kirshbaum is employed with us as Senior
Corporate Counsel and is Mr. Kaplan’s daughter. DuringMr. Schulze’s family members were compensated at
fiscal 2005, Ms. Kirshbaum received approximatelylevels comparable to the compensation paid to
$165,000 in base salary and short-term incentives, andnon-family members in similar positions.
was awarded options to purchase 1,365 shares of BestBuy Common Stock at a price of $55.09 per share andRonald James630 restricted shares. The stock options expire in
Ronald James, a director, is president and chief October 2014, and the restricted shares vest over aexecutive officer of the Center for Ethical Business three-year period in a range from 0% to 200% basedCultures (‘‘CEBC’’). CEBC is an independent, non-profit on our achievement of certain performance goals duringorganization affiliated with the University of St. Thomas. such period.In May and June of 2004, CEBC provided ethics
Before his resignation in March 2005, Michael J.training for our management team. We paid CEBC
Stillman was employed with us as Director — Businessapproximately $44,000, including reimbursement for
Group Manager. Mr. Stillman is Mr. Kaplan’s stepson.out-of-pocket expenses, in exchange for training services
During fiscal 2005, Mr. Stillman received approximatelyand materials. We do not intend to engage CEBC for
$260,000 in base salary and short-term incentives, andfurther training services during Mr. James’ tenure on the
was awarded options to purchase 3,495 shares of BestBoard. In addition, we have been a corporate member
Buy Common Stock at a price of $55.09 per share andof CEBC since 1998 and have paid annual membership
690 restricted shares. The stock options and thedues of $7,500 per year. Through our membership, we
restricted shares were canceled upon his resignation.are able to share ideas and exchange information, suchas best practices for fostering and promoting ethical Mr. Kaplan’s family members were compensated atresponsibility, with other CEBC corporate members. The levels comparable to the compensation paid tototal amount paid to CEBC during fiscal 2005 was non-family members in similar positions.approximately $51,000.
Matthew H. PaullElliot S. Kaplan
Matthew H. Paull, a director, is corporate seniorElliot S. Kaplan, a director, is a partner with the law executive vice president and chief financial officer offirm of Robins, Kaplan, Miller & Ciresi L.L.P. (‘‘RKMC’’), McDonald’s Corporation. In June 2004, we entered intowhich serves as our primary outside general counsel. a co-marketing agreement with McDonald’s. The
28
co-marketing agreement required us to provide coupons global managing partner for the retail practice atand gift cards redeemable for Best Buy merchandise and Accenture and a member of Accenture’s executiveservices in exchange for promotional advertising in committee. In connection with his former employment,which our tradename and logo were featured. The Mr. Willett acquired shares of Accenture Class Aapproximate retail value of coupons and gift cards common stock. We have routinely engaged Accenture asredeemed in connection with the promotion was an outside consultant since 1996. In 2004, we engaged$1.8 million. We had entered into a similar Accenture to assist us with improving our operationalco-marketing agreement with McDonald’s in fiscal 2004, capabilities and reducing our costs in the humanand we may engage in similar promotional activities resources and information technology areas. Mr. Willettwith McDonald’s in the future. sold all of his shares of Accenture Class A common
stock on January 26, 2005.Robert A. Willett
Robert A. Willett is our Executive Vice President —Operations. Prior to joining us, Mr. Willett was the
29
6MAY200514242150
B E S T B U Y S T O C K C O M P A R A T I V E P E R F O R M A N C E G R A P H
The information contained in this Best Buy Stock Index’’), of which we are a component, and theComparative Performance Graph section shall not be Standard & Poor’s Retailing Group Industry Index (thedeemed to be ‘‘soliciting material’’ or ‘‘filed’’ or ‘‘S&P Retail Index’’), of which we are a component. Theincorporated by reference in future filings with the SEC, S&P Retail Index is a capitalization-weighted index ofor subject to the liabilities of Section 18 of the Securities domestic equities traded on the NYSE, the AmericanExchange Act of 1934, except to the extent that we Stock Exchange and NASDAQ, and includesspecifically incorporate it by reference into a document high-capitalization stocks representing the retail sector offiled under the Securities Act of 1933 or the Securities the Broad Market Index.Exchange Act of 1934.
The graph assumes an investment of $100 at the closeThe graph below compares the cumulative total of trading on February 25, 2000, the last trading dayshareholder return on Best Buy Common Stock for the of fiscal 2000, in Best Buy Common Stock, the Broadlast five fiscal years with the cumulative total return on Market Index and the S&P Retail Index.the Standard & Poor’s 500 Index (the ‘‘Broad Market
Comparison of the Five-Year Cumulative Total Returns on Common Stockof Best Buy Co., Inc., Broad Market Index and S&P Retail Index*
$100.00
$100.00
$100.00
$83.54
$85.98
$97.50
$141.73
$86.19
$116.23
$90.84
$64.85
$80.47
$167.60
$88.97
$125.74
$163.96
$95.18
$139.66
2000 2001 2002 2003 20052004
$0
$20
Best Buy Co., Inc.
Broad Market Index
S&P Retail Index
$40
$80
$60
$100
$120
$160
$140
$180
* Cumulative Total Returns assumes dividend reinvestment.
Source: Research Data Group, Inc.
30
A U D I T C O M M I T T E E R E P O R T
The information contained in this Audit Committee written disclosures and the letter from E&Y as requiredReport shall not be deemed to be ‘‘soliciting material’’ or by Independence Standards Board Standard No. 1,‘‘filed’’ or incorporated by reference in future filings with Independence Discussions with Audit Committees. Thethe SEC, or subject to the liabilities of Section 18 of the committee reviewed all services provided by and theSecurities Exchange Act of 1934, except to the extent amount of fees paid to E&Y in fiscal 2005. In reliancethat we specifically incorporate it by reference into a on the reviews and discussions with management anddocument filed under the Securities Act of 1933 or the E&Y, the committee believes that the services providedSecurities Exchange Act of 1934. by E&Y were compatible with, and did not impair, its
independence.The Audit Committee is comprised of four members andacts under a written charter adopted and approved by The committee met 17 times, including 11 times viathe Board. The committee’s charter is posted on our Web conference call, during fiscal 2005. The committeesite at www.BestBuy.com — under ‘‘Company schedules its meetings to ensure it has sufficient time toInformation,’’ select the ‘‘For Our Investors’’ link and then devote appropriate attention to all of its tasks. Thethe ‘‘Corporate Governance’’ link. All members of the committee meetings include regular executive sessionscommittee meet the SEC and NYSE definitions of with our independent registered public accounting firm,independence and financial literacy for audit committee internal auditors and management. The committee alsomembers. In addition, Matthew H. Paull, an independent discusses with our internal auditors and independentdirector and a member of the Audit Committee, has registered public accounting firm the overall scope andbeen determined by the Board to be an audit committee plans for their respective audits.financial expert for purposes of the SEC rules. No
In reliance on the reviews and discussions referred tomember of the Audit Committee serves on the audit
above, the committee recommended to the Board, andcommittee of more than three public companies.
the Board approved, that the annual audited financialThe committee, on behalf of the Board, reviewed and statements be included in our Annual Report ondiscussed with both management and Ernst & Young LLP Form 10-K for the fiscal year ended February 26, 2005,(‘‘E&Y’’), our independent registered public accounting as filed with the SEC.firm for the fiscal year ended February 26, 2005, theannual audited financial statements for fiscal 2005, and Change in Certifying Accountantthe quarterly operating results for each quarter in such
On May 10, 2005, contemporaneously with thefiscal year, along with the related significant accounting
conclusion of the audit for our fiscal year endedand disclosure issues. These reviews included discussions
February 26, 2005, E&Y was dismissed as ourwith the independent registered public accounting firm
independent registered public accounting firm. We hadof matters required to be discussed pursuant to
previously announced that the committee and E&Y hadStatement on Auditing Standards No. 61,
determined that E&Y would be dismissed as ourCommunications with Audit Committees, and discussions
independent registered public accounting firm, effectivewith management about the quality, not just the
at the conclusion of such audit. The reports of E&Y onacceptability, of the accounting principles, the
our financial statements for the fiscal years endedreasonableness of significant judgments and the clarity
February 26, 2005, and February 28, 2004, and onof the disclosures in the financial statements.
internal control over financial reporting as ofThe committee also discussed with E&Y its independence February 26, 2005, did not contain an adverse opinionfrom management and Best Buy, and received the or a disclaimer of opinion and were not qualified or
31
modified as to uncertainty, audit scope or accounting Each year, prior to engaging the independent registeredprinciples. In connection with the audits for the two most public accounting firm, management submits to therecent fiscal years and through the date of dismissal, committee for approval a list of services expected to bethere were no disagreements with E&Y on any matter of provided during that fiscal year within each of the twoaccounting principles or practices, financial statement categories of services described below, as well asdisclosure, or auditing scope or procedure, which, if not related proposed fees.resolved to the satisfaction of E&Y, would have caused
1. Audit services include audit work performed on theE&Y to make reference thereto in their reports on the
financial statements, as well as work that generallyfinancial statements for such fiscal years. During the two
only the independent registered public accountingmost recent fiscal years and through the date of
firm can reasonably be expected to provide,dismissal, there have been no ‘‘reportable events,’’ as
including comfort letters, statutory audits andsuch term is defined in Item 304(a)(1)(v) of
discussions surrounding the proper application ofRegulation S-K.
financial accounting and/or reporting standards.Representatives of E&Y are expected to be present at the
2. Audit-Related services include assurance andMeeting. They will have the opportunity to make a
related services that are traditionally performed bystatement if they desire to do so and are expected to be
the independent registered public accounting firm,available to respond to appropriate questions.
including due diligence related to mergers andEffective February 27, 2005, we engaged Deloitte & acquisitions, employee benefit plan audits andTouche LLP (‘‘D&T’’) as our independent registered public special procedures required to meet certainaccounting firm for fiscal 2006. The engagement of D&T regulatory requirements.was approved by the Audit Committee, and the full
As appropriate, the committee then pre-approves theBoard recommends that the shareholders ratify such
services and the related proposed fees. The committeeappointment at the Meeting. See ‘‘Item 2 — Ratification
requires the independent registered public accountingof Appointment of Our Independent Registered Public
firm and management to report actual fees versus theAccounting Firm’’ on page 33.
proposal periodically throughout the year by category ofDuring the two most recent fiscal years and prior to its service. During the year, circumstances may arise whenengagement, we had not consulted with D&T regarding it may become necessary to engage the independentany of the matters or reportable events set forth in Item registered public accounting firm for additional services304(a)(2)(i) and (ii) of Regulation S-K. not contemplated in the initial annual proposal. In those
instances, the committee pre-approves the additionalPre-Approval Policy services and related fees before engaging the
independent registered public accounting firm to provideConsistent with SEC rules regarding auditor
the additional services.independence, the committee has responsibility forappointing, setting compensation and overseeing the AUDIT COMMITTEEwork of the independent registered public accounting
Hatim A. Tyabji, Chairmanfirm. In recognition of this responsibility, it is the policy
Robert T. Blanchardof the committee to pre-approve all audit and
Matthew H. Paullpermissible non-audit services provided by the
Frank D. Trestmanindependent registered public accounting firm except forminor audit-related engagements which in the aggregatedo not exceed 5% of the fees we pay to the independentregistered public accounting firm during a fiscal year.
32
I T E M 2 — R A T I F I C A T I O N O F A P P O I N T M E N T O F O U RI N D E P E N D E N T R E G I S T E R E D P U B L C A C C O U N T I N G F I R M
statements. The audit fees for fiscal 2005 includeTHIS SECTION SHOULD BE READ IN CONJUNCTION$1,163,000 for professional services rendered in
WITH THE ‘‘AUDIT COMMITTEE REPORT’’ ON connection with the audit of the effectiveness of ourPAGES 31-32. internal control over financial reporting, and attesting to
management’s assessment thereof, pursuant to Section 404The Audit Committee appointed Deloitte & Touche LLP of the Sarbanes-Oxley Act of 2002.
(‘‘D&T’’) as our independent registered public accounting (2) Consists of fees for specific additional audit-relatedprocedures with respect to our accounting for income taxesfirm for the fiscal year that began February 27, 2005.and for one of our subsidiaries, as well as the audits of
We will ask shareholders to ratify the appointment of our Retirement Savings Plan and the Best Buy Children’sD&T as our independent registered public accounting Foundation. In addition, the audit-related fees for fiscal
2004 include fees for professional services rendered infirm at the Meeting. Representatives of D&T areconnection with the review of documentation of our
expected to be present at the Meeting. They will have internal control over financial reporting.the opportunity to make a statement if they desire to do (3) Consists of fees for tax advisory services in connection withso and are expected to be available to respond to the preparation of amended tax returns; claims for refund;
tax planning; and tax audits and appeals.appropriate questions.(4) In fiscal 2003, we adopted a policy pursuant to which our
independent registered public accounting firm could noPrincipal Accountant Fees and Services longer be engaged to provide services which were notaudit or audit-related services, except that E&Y could
For the fiscal year ended February 26, 2005, Ernst & complete tax and other projects for which it had alreadyYoung LLP served as our independent registered public been engaged. Also, in exceptional circumstances and
using stringent standards in its evaluation, the Auditaccounting firm. The following table presents theCommittee may authorize exceptions to the foregoing
aggregate fees incurred for audit and non-audit services policy permitting the independent registered publicaccounting firm to provide tax services when it would berendered by E&Y during fiscal years 2005 and 2004.inefficient or ineffective to use another tax service provider.
The fees listed below were pre-approved by our Audit However, the Audit Committee’s intention is to not engageCommittee pursuant to the committee’s pre-approval our independent registered public accounting firm for tax
advisory services in the future.policy described above:
Service Type Fiscal 2005 Fiscal 2004 Board Voting RecommendationAudit Fees(1) $2,584,000 $1,011,000
The Board recommends that shareholders vote FOR theAudit-Related Fees(2) 99,000 170,000
proposal to ratify the appointment of Deloitte & ToucheTax Fees(3)(4) — 150,000
LLP as our independent registered public accounting firmAll Other Fees — —
for the fiscal year that began on February 27, 2005.Total Fees Billed $2,683,000 $1,331,000
If the appointment of D&T is not ratified by the(1) Consists of fees for professional services rendered in shareholders, the Audit Committee is not required to
connection with the audits of our financial statements forappoint another independent registered publicthe fiscal years ended February 26, 2005, and
February 28, 2004; the reviews of the financial statements accounting firm. However, the committee will giveincluded in each of our Quarterly Reports on Form 10-Q consideration to an unfavorable vote.during those fiscal years; consultations on accountingmatters; statutory audit filings; and SEC registration
33
7MAY200421084229
O T H E R B U S I N E S S
Management and the Board are not aware of any other before the Meeting, the Proxy Agents will vote theitems of business that will be addressed at the Meeting. shares they represent as the Board recommends.If any other items of business are properly brought
P R O P O S A L S F O R T H E N E X T R E G U L A R M E E T I N G
Any shareholder proposal intended to be presented for intended to be presented for consideration at the 2006consideration at the 2006 Regular Meeting of Regular Meeting of Shareholders though not included inShareholders and to be included in our proxy statement our proxy statement will be considered untimely iffor that meeting must be received at our principal received after April 6, 2006. In the event of an untimelyexecutive offices at 7601 Penn Avenue South, Richfield, proposal, our designated Proxy Agents may haveMinnesota 55423, no later than January 21, 2006. Any discretionary authority to vote on such proposal.shareholder proposal received after that date and
